Indian unicorns are becoming increasingly notorious for financial discrepancies and questionable governance practices. The latest to join this growing line is GoMechanic, the Sequoia-backed start-up that yesterday admitted to ‘irregularities’ in their financial reports before announcing the layoff of 70 per cent of its workforce. 

Founded in 2016, Gurgaon-based car repair unicorn has raised $62 million to date, having last raised $42 million in Series C funding led by Tiger Global in June 2021. The start-up's undoing also came in the process of chasing more funding. 

Hot Pursuit For Capital   

GoMechanic was recently in the process of raising around $80 million in a Series D funding round led by SoftBank’s Vision Fund and Malaysian sovereign fund Khazanah Nasional. The talks around investment had several twists and turns, as the car repair firm’s valuation expectations did not match the number that the investors had in mind. 

In the meantime, the prospective investors hired EY to provide them with a due diligence report. EY’s audit brought to light several discrepancies which went unnoticed in previous audits conducted by other firms. 

For its first two years, the start-up's financials were audited by smaller firms. PwC did the audit in FY21 and that was followed up by KPMG in FY22, as per a report by Moneycontrol. They did not find any irregularities and consequently, no qualifications were issued.  

However, while completing the audit jointly commissioned by SoftBank and Khazanah Nasional, EY found out that 60 of over 1,000 GoMechanic service centres might have overstated revenue and diverted funds. This amounts to financial misreporting, as admitted by the car servicing start-up's co-founder Amit Bhasin himself. 

In a Linkedin post, Bhasin wrote, "Our passion to survive the intrinsic challenges of this sector and manage capital took the better of us and we made grave errors in judgment as we followed growth at all costs, particularly in regards to financial reporting, which we deeply regret." 

One can slice or dice this statement anyway, but it still comes across as a confession that the company, and its top management, were party to deliberate financial misreporting.  

Not The First Time 

Following the discovery of GoMechanic’s financial discrepancy, the prospective investors pulled out of the funding talks, according to a Bloomberg report. Further, they went on to inform Sequoia about the lapses. 

This is not the first time that an Indian start-up backed by Sequoia has been in the news for poor governance and questionable financial practices. Over the past few months, several cases have emerged where these start-ups have erred on the wrong side of financial reporting to ride the funding wave. This includes edtech major Byju's, tech and commerce platform Zilingo and payments app BharatPe. 

Byju’s had come under fire for taking too long to file their audited results for FY 2020-21. After facing blowback from industry stakeholders, customers and parliamentarians like Sivaganga's Member of Parliament Karti Chidambaram, the edtech firm finally released its audited results in September 2022. 

I have written to ⁦@theicai⁩ urging them to probe the financial statements of ⁦@BYJUS⁩ pic.twitter.com/S5l1bVQxNW

— Karti P Chidambaram (@KartiPC) October 14, 2022

While the projected revenue from the unaudited results stood at about Rs 4,400 crore, the audited results revealed that its revenue from operations has been readjusted to Rs 2,280 crore for FY 2020-21. This was a whopping 48 per cent drop from its unaudited figures. 

Financial irregularities were also noted at BharatPe, when a preliminary investigation by Alvarez and Marsal (A&M) and PwC in January 2022 unearthed fraudulent transactions. This included payments to non-existent vendors. The then CEO of BharatPe, Ashneer Grover, was accused of being involved in related-party-transactions.

Following the allegations, Grover resigned from the company and has since been taking jibes at BharatPe's management on social media platforms, claiming he was framed in the disgraceful incident. He even released a tell-all book, Doglapan, where he wrote things like: “Put yourself first, always. Liquidate your stock at every secondary sale opportunity.”

Partners In Arms 

Interestingly, Grover recently supported Ankiti Bose, Zilingo's former CEO, who was sacked from the company over financial irregularities. A common thread between Zilingo and Byju's is that both start-ups dragged their feet when filing their annual financial statements. Till August 2022, KPMG had not signed off on Zilingo's FY20 results, which indicated that something was amiss at the start-up. 

As revenues at Zilingo moved southwards, so did the relationship between Bose and Shailendra Singh, head of Sequoia India. Things got so acrimonious that Sequoia's lawyers reportedly issued a legal notice to Bose in May 2022 to stop making accusations that could taint the venture capital company's reputation. 

Despite being backed by big names from the world of venture capital, how is it that corporate governance takes a back seat in these prominent Indian start-ups? They seem to be led by rash drivers who are not too keen on avoiding undue risks. Maybe the start-ups are chasing growth figures and raising funds "at all costs" as Bhasin stated, turning a blind eye to the ethics of operations. 

Steering Clear Of The ‘Lala’ Way 

The management issues at several new-gen Indian start-ups raise its comparison with ‘Indian lala’ companies. Here, lala companies refer to small family businesses that are run by people who inherit the business rather than by those who are eligible to run the business. Naturally, those companies are plagued by governance issues as well. 

If Indian start-ups are to compete with their global peers, an upgradation of their governance practices is desperately needed. The lala mentality has to be shed, and corporate governance, as seen in well-established MNCs, has to be emulated. 

One need not look far for this solution. While the present crop of Indian start-ups is grabbing headlines for achieving high valuations and luring in VC funds, there is an older generation of start-ups who achieved a lot without seeking high valuation in the nascent years of their business journey.   

The first generation of Indian start-up space saw the rise of homegrown companies like Infosys and TCS that catered to the global demand for software services. They set a standard of governance that is well-respected worldwide. If their examples are to be followed, the Indian start-up ecosystem can get rid of its present ‘fast and furious’ attitude which comes with several risks, and follow a regime where financial discipline and good governance can lead the business to a sustainable growth model.